MAGAZINE: Once in a lifetime

It started as many significant events do in European real estate with a meal in a restaurant. Andrew Thornton and Jos Short, co-founders of Internos Global Investors, are having lunch at an Italian in Mayfair, London, with someone they have never met before, and in all honesty had not heard of until being made aware of him via an introductory message.

The man now ordering food at the table with them is Pat Halter, chief executive officer of US group Principal Global Investors (PGI), part of the giant Des Moines, Iowa-based financial company Principal Financial Group. He is interested in discussing whether Internos could become the European real estate platform for the company’s Principal Real Estate Investors group, a top 10 global real estate manager with $74.3 bn AUM (€57.6 bn), which he has been leading for years.

For Internos, the initial approach felt a bit early. Thornton and Short had established in 2008 and had grown it to 100 people in London and eight Continental European countries and €4.8 bn of AUM.   ‘It was actually a bit early in the life of our company to think about this,’ says Thornton, ‘but we said to ourselves that you don’t get a company like this knocking on the door every day. It was also the only one of the global top 10 asset managers that didn’t already have a European real estate platform. If we wanted to make the most of our business and operate at the highest level of the industry, it was a once-in-a-lifetime opportunity.’ 

Love over pasta
The conversation with Halter goes well. Extremely well, in fact. They hit it off talking about their respective careers, experiences and so on, and it is clear to the Internos founders that Halter absolutely loves PGI, the real estate industry and its global institutional clients, of which there are many - over 450.  ‘There was a real meeting of minds,’ Thornton says. ‘There was genuine warmth and it just felt right. We were not selling, just talking and exploring.’

Over that lunch, it became clear there were similarities in culture, values and approach. For instance, the way both companies tried to foster a family-like feel to the organisations. The firms, although poles apart in terms of size, also resembled one another in terms of attitude towards clients, transaction processes and governance. This led Thornton to believe they would not have to ‘re-engineer’ Internos should it enter a deal. Agreeing to become the European platform would not be such a ‘big leap’ either for Internos’ investors. And, it made both sides comfortable that both Thornton and Short had already served as European leaders of US-based global real estate investment businesses in their careers (Invesco and what is now PGIM respectively).

This was in 2017. Later in the year, Thornton and Short travel to Des Moines to meet members of the team running Principal Real Estate Investors. Thornton continues: ‘We went over to Des Moines and I don’t think we met many people who hadn’t been at the company for 30 years. We found a warm family feel, which is what we like to think we’ve created at Internos. And here was a company where real estate was right at the centre of things, not tangential.’ 

A key figure they met was Todd Everett, the current CEO of Principal Real Estate Investors. Everett says Principal Real Estate Investors had been searching for the right European platform since as far back as 2008. ‘It has been a strategic objective of ours to expand our global real estate footprint,’ he says. 

Just as Thornton and Short were not at all familiar with Principal Real Estate Investors, Everett knew little about Internos. However, throughout many months of working on the agreement and subsequent integration, he says he was confident things would go as smoothly as one could expect in such a transaction. ‘We found throughout the entire process that what defines our organisation is very similar to what defines Internos.’ 

Talks and planning with Internos continued throughout 2017, culminating in an official announcement in December 2017. By April 2018 – almost exactly a year ago - the acquisition was complete; Internos Global Investors had become Principal Real Estate Europe. This past year, plenty of strategic planning and integration work has been occurring. The website, marketing material and the Decisive Eye publication have been stamped with the Principal Real Estate Europe brand. Principal Real Estate Investors has spent much time understanding the intricacies of Principal Real Estate Europe’s structure, and whether that can be improved upon for the benefit of its global client base. Principal Real Estate Europe has fund structures and presence in the UK, Luxembourg, Frankfurt and Paris. This presence has to do with the nature of its cross-border investing activities invoking different fund domiciles, legal systems, tax regimes, and leasing practices. 

Before detailing the direction of travel for the new European platform, Everett explains a little of the history to Principal Real Estate Investors – something of an unknown quantity in Europe, which is somewhat surprising given its large AUM and long history in the sector going back to the 1950s.

Steeped in history
Principal Real Estate Investors manages over $74.3 bn of AUM in funds and separate accounts in four areas: private debt, private equity, public debt (CMBS) and REITs. Everett says the company is one of only a handful of the top 50 global real estate investment managers active in all four quadrants. Moreover, it offers a deep expertise across the risk spectrum from core and core-plus to value add, development and opportunistic to debt investing. 

Its real estate roots were put down in the late 1950s when the company began investing in a credit tenant lending programme on behalf of an affiliated life insurance company. In 1963 it established a private equity real estate division, and in 1982 began managing a US Life Assurance Separate Account. From there it kept expanding. Today it is active in the US, Asia and Australia, and now of course – Europe. Meanwhile its parent, Principal Financial Group, remains a leading player in global pensions, insurance and asset management and its investment arm, PGI, has global assets worth $412.7 bn in equities, the real estate business, multi-asset, fixed income and alternatives. 

By the time Everett joined in the mid-1980s the company had already expanded real estate activities from lending to making equity investments and investments in net leases. Its first fund was launched in the early 1980s. But it was later that same decade that it opened up its services to unaffiliated investors. Its first third-party real estate client was a large US public pension plan in 1988 under a debt programme. Another milestone was adding a large Japanese insurance company in the early 1990s. Both remain clients.

Plans for Principal Real Estate Europe
The most immediate plan for Principal Real Estate Europe seems to be the relaunch of a core European fund. But much more than this, there is a deep desire to replicate Principal Real Estate Investors’ US model, which means its European platform will likely expand to offer property development projects, opportunistic investments and debt strategies alongside its existing core and value add lines.  A lot of work has been done behind the scenes on how products can be best structured for Principal’s global client base, as well as matching the objectives of those investors with the European real estate opportunities. 

Everett explains several factors in Europe that make the company ‘feel excited’ about 2019 and investment opportunities. ‘We have been bringing our US and Asian client base to Europe and the reaction has been very positive. Real asset investment both in the US and Europe has continued to have strong appeal particularly if you look at how private asset valuation has held up in comparison to public investment alternatives here over the last quarter. The income component of total returns we think has stability in key European markets with solid income growth potential on a long-term basis. For example, we believe in the office market where we see rental growth projections in Berlin, Stockholm, Madrid, Barcelona, Hamburg, Amsterdam as being actually better than for the major US markets today. So to have these markets available to guide our investors to is particularly appealing.’ Everett adds the belief that investors should look for ‘sustainability’ by picking markets driven by new age economic factors such as innovation, technology, bio science, fintech, and cities with good infrastructure and business incubators tied to some of these areas. 

‘The other thing we like are the tempered new construction levels in Europe versus what we have in the US. That is not to say there is material overbuilding in the US, but construction levels as a percent of existing stock are higher in the US as they almost always are. That provides a more tempered new construction aspect to Europe over the next few years.’ 

Brexit might create volatility, but Principal had already embarked upon development of logistics in the UK (and in Poland) on behalf of one of its US clients before the Principal Real Estate Europe transaction transpired and has had a good experience.  

Lynchpin liaison
Principal believes the best way to introduce Europe opportunities to clients is to use someone involved with existing investors. Jay Davis, a senior managing director who joined Principal Real Estate Investors in 2000, has become that lynchpin liaison between the US and Europe. In addition, a Chicago-based equity asset manager has transferred to London to share best practices in asset management with a development capability. 

‘We think that by sharing our best practices and deep development experience in the US, we believe there are opportunities to develop in Europe and to perform opportunistic strategies,’ says Everett. ‘Principal Real Estate Europe has been active in core and value add, and our theory is we will be able to replicate in Europe what we do in the US in terms of the full spectrum of return activity.’ 

Principal Real Estate Europe employs 100 people, roughly 75 of which are in its Continental Europe offices. Says Thornton: ‘I very much see my job as bringing the right capital to opportunities where we have conviction and belief across the risk spectrum.’  He states that it is very hard to ‘live’ on value add alone, so it needs to be in the core space as well as development and opportunistic deals. In May 2017, Internos reached first close on the Internos Core European (ICE) open-ended fund with €135 mln of equity but it seems a new channel is being development under the Principal Core European brand. In the US, Principal manages a $10 bn core open-ended fund launched in 1982. Everett says, ‘Having a European complement to that is something that we found very appealing to be able to offer to our client base. This fund is going to be available to a very broad base of investors when the relaunch occurs which hopefully will be early in 2019.’

Thornton is aware that given the opportunity a core-open ended fund would have been launched earlier. Nevertheless, he believes under Principal’s auspices the ambition is ‘to become a leader in that space in Europe.’ ‘We have a very big priority and focus on that.’ 

Funds and separate accounts
Everett explains its US private real estate equity operation is extremely deep with well over 300 institutional clients invested in comingled funds and separate accounts. Since 2001, the company has completed $15.7 bn of value add and development investment activity in over 325 projects alongside local developers. ‘It is really something we want to introduce in Europe,’ he adds.

There is not much distress in Europe. So, income growth is piquing more interest. For development or investing in real estate operating companies, the capital could derive from separate accounts rather than funds, says Thornton. ‘We also see certain specialist sectors that we like such as German health care. At Principal Real Estate Europe we have a long track record in hotels as well, so we think it is interesting to look at that more broadly. Real estate debt is the other sector we really like. Todd and his team are masters of it in the US. With that expertise and our underwriting with teams on the ground it is something to exploit.’

Finally, Everett mentions Principal Real Estate Europe’s expertise in hotels in Europe that could be exported not only to North America but globally. To date, Principal Real Estate Investors has financed hotel investments but has done little in equity investments. 

Summing up, he says: ‘It is very exciting. We are looking forward to taking some of our capabilities across the Atlantic and leveraging the experience in Europe this way. There are a lot of exciting things I think we will be able to exercise.’  Thornton says: ‘We are way smaller than Todd and his team, but our aspirations are no smaller.’

Principal Real Estate Europe

HQ: London
Parent company: Principal Financial Group (based in Des Moines, Iowa) 
Offices: London, Frankfurt, Amsterdam, Paris, Lisbon, Luxembourg, Madrid and Milan Leadership: Andrew Thornton (founding member and CEO) and Jos Short (founding member) 
Staff: >100
AUM: €4.8 bn 

Principal Real Estate Investors

HQ: Des Moines, Iowa
Leadership: Todd Everett, CEO 
AUM: $74.3bn (€57.6bn)
Strategies: private equity, public equity, private debt, public debt 
Investment teams: US, Europe, Asia and Australia

Andrew Thornton
Andrew Thornton, together with Jos Short, founded Internos Global Investors (now Principal Real Estate Europe) in 2008. He was previously one of the founders and ultimately COO of Invesco Real Estate in Europe, a business formed in 1997 as Parkes and Company. From 1993 to 1996 he worked at developer Lend Lease.

Todd Everett
Todd Everett is the CEO of Principal Real Estate Investors. He has worked at Principal for 34 years having joined in 1985.